The first scenario is that Bo Broker Company will accept a non-interest bearing or unsecured negotiable note that is payable over the life of the related construction mortgage. The second scenario is that Bo Broker Company will accept a non-negotiable note whose eligibility for payment also runs for the period of the mortgage. The third scenario is that Bo Broker Company will accept a commitment letter in which the receiver doesn’t get paid upon construction draws. Lastly, the fourth scenario is that Bo Broker Company will accept a commitment letter that requires the receiver to pay upon receiving draws for the construction from the lender. Bo Broker Company has inquired from the accountant, Kiss Our Assets, LLP, when the revenues under each scenario will be recognized.
There are many issues with this case. The first issue is whether there should be four different payment scenarios or one particular payment scenario. The second issue is whether the contractual terms that have been agreed upon are acceptable methods under the appropriate standards or codifications. The third issue is how Bo Broker Company should recognize revenue.
... middle of paper ...
...dered until the actual borrowing takes place. A portion of the fees is required to be deferred until the future draw takes place. In order to recognize the profit by the full accrual method for the mortgaged property, the buyer must demonstrate that there’s full commitment but partial payments shall not allow for the application of the full accrual method (ASC 360-40-17).
Bo Broker Company needs to choose between the percentage-of-completion method and the completed contract method. After considering all of the circumstances above, Bo Broker Company has to make a choice between the four scenarios. It is certainly good to recognize revenue based on the percentage-of-completion method, such as applying the negotiable note or a commitment letter that is contingent on future draws. However, revenue for the four scenarios presented above should be recognized as indicated.
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